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More on the Foreclosure Settlement

More details are emerging on how the $26 billion settlement over
mortgage abuses will benefit homeowners. Here's an update.

Mortgage refinancing

As previously reported, $3 billion of the settlement will go
toward refinancing underwater mortgages, that is, home loans where
borrowers owe more than their homes are worth due to falling
property values. But it's not at all clear how these funds might be
used. It appears that these funds will be used to offset the cost
of reducing mortgage interest rates through refinancing, rather
than writing off part of the borrower's debt through a principal
reduction.

An executive summary of the terms of the settlement makes no
mention of principal reductions in connection with mortgage
refinancing, only with loan modifications for delinquent borrowers
(see below). That suggests that this portion of the settlement will
focus on reducing interest rates for borrowers instead.

The average underwater homeowner has about $260,000 in total
mortgage debt, according to recent figures from CoreLogic. Reducing
the interest rate on that debt by 1 - 1.5 percentage points save
would the average homeowner about $200-$280 a month. That works out
to enabling about 300,000-400,000 underwater homeowners to
refinance.

To qualify for refinancing under the settlement, borrowers must
be underwater on their mortgage, be up-to-date on their mortgage
payments, have a current interest rate of at least 5.25 percent and
be able to save at least $100 a month through refinancing.

Loan modifications

At least $10 billion of the settlement will be used for
principal reductions on underwater mortgages where borrowers are
either in default or at risk of defaulting. If the average markdown
is $20,000, as predicted, that would help half a million
homeowners. However, both that total and the average could turn out
higher, because the specifics of the settlement do not necessarily
give banks a full dollar of credit for each dollar of relief
provided.

Principal reductions will be tied to loan modifications, in
which the terms of the current mortgage are adjusted, such as by
extending the term or reducing the interest rate, without actually
refinancing the loan.

Short sales and forbearance

The settlement executive summary indicates that $5.2 billion
will be made available for other types of homeowner assistance,
including facilitating short sales that allow the homeowner to
surrender an underwater property short of foreclosure.

That portion of the settlement will also be used to defer
mortgage payments for homeowners who are temporarily unemployed,
and to waive debts owed for payment deficiencies.

Foreclosure compensation

As previously reported, some $1.5 billion will be used to
provide payments of $2,000 as compensation to former homeowners who
were foreclosed on after Jan.1, 2008.

Servicer reforms

Other parts of the settlement impose reforms on the way banks
subject to the agreement pursue foreclosures and manage mortgages
in their portfolios. Lenders will be prohibited from foreclosing on
a homeowner who is in the process of seeking a loan modification
and banks will be required to make available one staff member as
the primary point of contact for borrowers seeking loan
modifications.

Who's eligible

To qualify for mortgage assistance, you must have a mortgage
with one of the five major banks participating in the agreement -
Bank of America, Wells Fargo, JP Morgan Chase, Citibank and Ally
Financial (formerly GMAC). Homeowners with mortgages backed by
Fannie Mae, Freddie Mac or the FHA are not eligible, even though
one of the above banks may be servicing their mortgage, as those
agencies did not participate in the agreement. Other, smaller banks
may yet sign onto the settlement.

Why did this happen?

The settlement resolves federal and state claims against the
banks involved over alleged improprieties, particularly a practice
known as "robosigning" or rubber-stamping foreclosure affidavits
without properly verifying them. Other complaints included
foreclosing on borrowers who had been told they were being
evaluated for a loan modification, and failing to process
borrower's requests for a modified payment schedule.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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